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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI CHANDRA POOJARI
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
ITA No.1397/Bang/2018 Assessment year : 2013-14
Geetha Pundaleeka, Vs. The Deputy Commissioner of No.4, 6th Cross, Income Tax (International Txn.), N R Colony, Circle 1(1), Bangalore – 560 019. Bangalore. PAN: ATQPG 4611B APPELLANT RESPONDENT
Appellant by : Shri G. Venkatesh, Advocate Respondent by : Smt. Priyadarshini Besaganni, Jt. CIT(DR)(ITAT), Bengaluru.
Date of hearing : 11.01.2022 Date of Pronouncement : 19.01.2022 O R D E R Per Chandra Poojari, Accountant Member This appeal by the assessee is directed against the order of the CIT(Appeals)-12, Bengaluru dated 31.3.2016 for the assessment year 2013-14 on the following grounds:-
“1. The Orders of the Learned Authorities below, in so far as it is against the Appellant is opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case. 2. The Learned Authorities below have erred in making / sustaining disallowance of Rs. 14,84,965 paid to Suzlon Ltd., as prior period expenses under the facts and circumstances of the case. Hence the disallowance made / sustained requires to be deleted.
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The Learned Authorities below have erred in making / sustaining disallowance of Rs. 1,34,832 paid to M/s. V J Shroff and Co., Chartered Accountants, as professional consultancy expenses under the facts and circumstances of the case. Hence the disallowance made / sustained requires to be deleted. 4. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and justice rendered.” 2. The assessee has filed petition for admission of additional evidence under Rule 29 of the ITAT Rules stating that the reliance on the aspect of TDS made and remitted during the AY 2013-14 was not taken by the assessee before the lower authorities as the need to place the same was not felt at that stage. However, in view of the new argument now advanced by the assessee before this Tribunal, it is incumbent for the assessee to bring these documents as additional evidence. The failure to produce these documents before the lower authorities was neither wilful nor deliberate and that these evidence are very essential for proper appreciation of the facts of the case.
We have heard both the parties on the admission of additional evidence. In our opinion, the assessee has explained the reasons for non- production of the same on the earlier occasion by good and sufficient reasons and hence they are admitted for adjudication.
The facts of the issue are that the AO examined the invoices for repairs and maintenance and noted that certain amounts pertained to prior or subsequent assessment year. He therefore disallowed a sum of Rs 14,84,965/-. The assessee submitted that it had bought windmills from Suzlon Limited for which annual maintenance contract (AMC) was also signed. The breakdowns in one of the windmills during August to January 2012, were attended to Suzlon, but it charged the breakdown charges as well as AMC. Aggrieved, the assessee refused to accept the bills. However
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Suzlon agreed to cancel a few bills and an amount was agreed between assessee and Suzlon which was paid in April 2012.
Another issue is that the assessee claimed a sum of Rs.66,489 & 68,343 as professional consultancy expenses paid to V.J. Shraff & Co. The AO verified the details and evidences and noticed that the professional services were relating to advice and assistance in filing NIVAT/CST return, registration of company etc which were for the FYs 2007-09, 2008-09, 2009-10. The total expenses Rs.1,34,832/-claimed on this account, not pertaining to-current year, were disallowed.
On appeal, on the first issue the assessee was asked to furnish documentary evidence in support of the claim that the liability for wind mill expenses was incurred during the year by the CIT(Appeals). The ld. AR referred to correspondence /emails of FY 16-17 to claim that one of the wind mills was facing problems. But no correspondence pertaining to the relevant year was filed to show as to why the expenditure was accounted for in the year under consideration. In view of this, the disallowance made by the assessing officer was upheld by the CIT(Appeals) and this ground was dismissed.
Regarding the disallowance of payment to V.J. Shraff, before the CIT(Appeals), the assessee submitted that Professional charges paid to VJ Shroff are based on a understanding that he has to get the clean assessment order from Maharashtra VAT authorities, and based on receipt of assessment order, the professional fees has been discharged; so the expenses crystallized in the F.Y. 2012-13. The assessee relied on the decision on Delhi High Court in the case Jagatjit Industries [ITA No. 848/2010) to state that the date of crystallization of the liability is relevant.
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The CIT(Appeals) examined the invoice raised by VJ Shraff and Company which revealed that the same is dated 29.04.2009. When questioned in this regard, the ld. AR explained that the payment was made in FY 2012-13 though the bills dates are of earlier period and that the payment was made based on an agreement with VJ Shraff and Company that the payment will be released after VAT orders are received. However, he admitted that he does not have this agreement. (This admission was recorded in the notesheet entry dated 06.02.2018, which has been duly signed by the ld. AR). In accordance with the decision of the Hon'ble Delhi High court in the case of Jagatjit Industries (Supra), the CIT(A) was of the view that the date of crystallization of the liability is 29.04.2009 and the expenditure is therefore not allowable in the year under consideration.
The contention of the ld. AR before us is that these two expenditure were actually incurred by the assessee in the assessment year under consideration as this expenditure crystallised in the year under consideration and the same has to be allowed in view of the proviso to section 40(a)(ia) of the Act.
The ld. DR relied on the orders of the lower authorities.
We have heard both the parties and perused the material on record. It may be pertinent to note that section 40(a)(ia) was inserted in the Income-tax Act by the Finance (No. 2) Act, 2004 with effect from 1-4-2005. The provisions of the said section as inserted originally with effect from 1-4- 2005 read as under:—
Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",—
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"(ia)any interest, commission or brokerage, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200 : Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid." The legislative intention behind introduction of the above provisions 12. as given in the Memorandum explaining provisions in the Finance (No. 2) Bill, 2004 was as under:—
"Under the existing provisions of sub-clause (i) of clause (a) of section 40, failure to make deduction at source from payment of interest, royalty, fees for technical services or any other sum which is payable outside India, or in India to a non-resident or to a foreign company or failure to make payment to the account of the Central Government, attracts disallowance of such payments in the hands of the payer. Deduction of such sum, is however, allowed in the computation of income if tax is deducted, or after deduction, paid in any subsequent year in computing the income of that year. With a view to augment compliance of TDS provisions, it is proposed to extend the provisions of section 40(a)(i) to payments of interest, commission or brokerage, fees for professional services or fees for technical services to residents and payments to a resident contractor or sub-contractor for carrying out any work (including supply of labour for carrying out any work), on which tax has not been deducted or after deduction, has not been paid before the expiry of the time prescribed under sub-section (1) of section 200 and in accordance with the other provisions of
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Chapter XVII-B. It is also proposed to provide that where in respect of payment of any sum, tax has been deducted under Chapter XVII-B or paid in any subsequent year, the sum of payment shall be allowed in computing the income of the previous year in which such tax has been paid. The proposed amendment will take effect from 1st day of April, 2005 and will, accordingly, apply in relation to the assessment year 2005-06 and subsequent years." [Emphasis supplied] Section 40(a)(ia) thus was introduced in the statute with a view to 13. augment the compliance of TDS provisions and a provision therefore was made therein to disallow the expenses for which tax was not deducted at source and/or the tax having been deducted at source was not paid to the credit of the Central Government within the time prescribed in section 200(1). It was also provided that if a deduction is subsequently made towards tax and paid after the time-limit, the assessee would be entitled to claim deduction in the year in which payment is actually made. This created a genuine and apparent hardship to the assessees especially in respect of tax deducted at source in the last month of the previous year, the due date for payment of which as per the time specified in section 200(1) was lying only on 7th of April in the next year. The assessee in such case thus had a period of only seven days to pay the tax deducted at source from the expenditure incurred in the month of March so as to avoid disallowance of the said expenditure under section 40(a)(ia).
With a view to mitigate this hardship, section 40(a)(ia) was amended 14. by the Finance Act, 2008 and the provisions so amended read as under:—
Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",—
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"(ia)any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid,— (A)in a case where the tax was deductible and was so deducted during the last month of the previous year, on or before the due date specified in sub-section (1) of section 139; or (B)in any other case, on or before the last day of the previous year: [Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted— (A) during the last month of the previous year but paid after the said due date; or (B) during any other month of the previous year but paid after the end of the said previous year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.]" The above amendments made by the Finance Act, 2008 thus 15. provided that no disallowance under section 40(a)(ia) shall be made in respect of the expenditure incurred in the month of March if the tax deducted at source on such expenditure has been paid before the due date of filing of the return. While proposing this amendment, it was explained by the Finance Minister that the taxpayer will now get a time period of six months for depositing the tax deducted at source in respect of expenditure incurred in the month of March so as to escape the disallowance of the said expenditure under section 40(a)(ia). The Finance Minister also made it clear that this proposed amendment has to be given retrospective effect from assessment year 2005-06. The assessees thus were classified in two
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categories, namely; one those who have deducted the tax during the last month of the previous year and two; those who have deducted tax in the remaining eleven months of the previous year. It was provided that in case of assessees falling under the first category, no disallowance under section 40(a)(ia) shall be made if the tax deducted by him during the last month of the previous year has been paid on or before the due date of filing the return as specified in section 139(1). In the cases of assessees falling under second category, no disallowance under section 40(a)(ia) shall be made if the tax deducted at source in the first element months of the previous year has been paid on or before the last day of the said previous year.
The amendment made by the Finance Act, 2008 to the provisions of 16. section 40(a)(ia) with retrospective effect from 1-4-2005 still left several assessees with grave hardships and un-intending consequences. Consequently, various representations were made to the Finance Minister with a request to tone down the rigour of law which was causing harsh and unintended consequences. In one of such representations made in the form of a pre-Budget memorandum for the year 2010, the Chamber of Tax Consultants stated as under:
"Total disallowance of the expenses in the previous year in which they are incurred if TDS is not deducted or deducted but not deposited within the due date is very harsh and causes undue hardship. The deductor discharges his vicarious liability by collecting tax and depositing on behalf of the Government. If any genuine business expenditure is disallowed on account of short deduction of TDS, it causes injustice & subjects the deductor to unfair & arbitrary treatment. The provision of section 40(a)(ia) penalizes the deductor over and above the provisions of penalty & prosecution under relevant sections of the Income-tax Act, 1961.
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Suggestions Scrap section 40(a)(ia). If not, once tax is deducted and accordingly deposited to the credit of the Central Government, then no disallowance should be made. Alternatively, expenses to be disallowed only if the tax is not deposited till the due date of filing of the return of income (i.e., In lines with Section 43B)." [Emphasis supplied] Similarly, in their pre-Budget Memorandum, the Confederation of 17. Indian Industry highlighted the general hardships caused to the assessees as under:—
"Section 40(a)(ia) provides for disallowance of the expenses incurred in the nature of interest, commission, brokerage, fees for professional services as well as payment to contractors if the tax has either not been deducted or if deducted not paid within the due date. This harsh provision brought on the statute book by the Finance Act, 2004 with effect from assessment year 2005-06. For a small default of not paying 1 per cent of the TDS to the Government the intention of the Legislature to disallow the whole of the expenditure which in turn will lead to levy of tax @ 33.99 per cent plus interest and penalty is unheard of in the world. The provision is a confiscatory inasmuch as that at times when the amount of TDS involved is only 1 per cent of the expense the additional tax liability comes to 33.99 per cent of the sum which is further increased by levy of interest under sections 234B and 234C. In most of the cases the total tax and interest liability comes to somewhere between 44 per cent to 46 per cent of the amount in question. It will be appreciated that such disproportionate burden on the assessees is for not collecting the tax from a third party (which is essentially a job of the Government) is undoubtedly unreasonable. It is more so in almost all such cases payments are through banking channels and
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are fully amenable to verification and there are hardly any reason to doubt that those receipts are not disclosed by the recipients. The argument is also no consolation to the businessman whose business in subsequent year is not good enough to absorb the deduction of expenses disallowed in earlier year under section 40(a)(ia). True the deduction can be allowed but if the computation of income results in loss in subsequent year, he does not benefit from such deduction. To sum up this aspect, it is clear that allowances of the deduction in subsequent year may not in all cases give full relief in subsequent year and secondly, there will be no relief whatsoever in respect of interest charged under sections 234B and 234C in the year of its disallowance. The ratio of the additional tax burden on the assessees to the alleged loss of tax, or its delay is preposterous. There are remedial provisions contained under Chapter XVII of the Income-tax Act for recovering of TDS amount interest and penalty thereon and therefore having provisions under section 40(a)(ia) is not only extremely harsh but tantamount to double taxation. Firstly he is penalized by amount equivalent to TDS along with a penal interest under section 201(A) and under section 220(2) secondly, he is again penalized by the provisions of section 40(a)(ia). Recommendation. Section 40(a)(ia) should drawn/deleted and/or bring suitable amendments in the said Act, to help assessee in losing genuine deduction on this account." [Emphasis supplied] The Hon’ble Finance Minister found merit in the above suggestions 18. made by the Industry in the form of representations in their pre-Budget Memorandum. Accordingly, the provisions of section 40(a)(ia) were amended by the Finance Act, 2010 and the said provisions as amended w.e.f. 1-4-2010 read as under:-
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"Notwithstanding anything to the contrary in sections 30 to [38], the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession". (ia) any interest, commission or brokerage, [rent, royalty] fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work) on which tax is deductible at source under Chapter XVII and such as has not been deducted or after deductions, [has not been paid on or before the due date specified in sub-section (1) of section 139] : [Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid]." While proposing the aforesaid amendments to section 40(a)(ia), 19. Hon’ble Finance Minister stated in para 137 of his Budget Speech delivered in the Parliament on 26th February, 2010 as reported in [321 ITR (St.) 1 at 24, page 34] as under:-
"Relaxing the current provisions on disallowance of expenditure, I propose to allow deduction of such expenditure, if tax has been deducted at any time during the financial year and paid before the due date of filing the return. This will allow most deductors additional time up to September of the next financial year. At the same time, I propose to increase the interest charged on tax deducted but not deposited by the specified date from 12 per cent to 18 per cent per annum." The Memorandum explaining the provisions in the Finance Bill, 2010 20. as reported in 321 ITR (St.) 119 also gave the following justification for the amendments proposed in section 40(a)(ia) :-
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"It is proposed to amend the said section to provide that no disallowance will be made if after deduction of tax during the previous year, the same has been paid on or before the due date of filing of return of income specified in sub-section (1) of section 139." As is clearly evident from the representations made by the industry 21. in the form of pre-Budget Memorandum, the speech of the Hon’ble Finance Minister while presenting the Budget for the year 2010-11 as well as the Memorandum explaining the amendments proposed in section 40(a)(ia), the amendments to section 40(a)(ia) are made to alleviate the genuine hardships and unnecessary financial liabilities imposed on the taxpayers by refusing to give deductions of bona fide expenditure only for the reason of technical non-compliance of TDS provisions. Such an attempt was earlier also made by making the amendments to the provisions of section 40(a)(ia) by the Finance Act, 2008 and the said amendments were consciously made with retrospective effect from 1-4-2005 keeping in view that the same were made with a view to mitigating the hardships caused to the assessee. The amendments made again to the provisions of section 40(a)(ia) by the Finance Act, 2010 to tone down the rigour of law with the same intention, however, are made with effect from 1-4-2010.
Now in view of this proviso, the contention of the ld. AR is that assessee is entitled for claiming deduction in the assessment year under consideration. In our opinion, this proviso will come to the rescue of the assessee, only when the expenditure was claimed by the assessee as a deduction in the earlier assessment year which was disallowed by the AO by invoking the provisions of section 40(a)(ia) of the Act on the reason of non-deduction of tax at source or remitting the same to the Government after deduction. But in this case, the assessee has not claimed this expenditure as deduction in the earlier assessment year on account of non- deduction of tax by invoking the provisions of section 40(a)(ia) of the Act.
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Being so, when it was not allowed disallowed by the AO in the earlier assessment year by invoking the provisions of section 40(a)(ia), the assessee in the subsequent assessment year cannot claim it as a deduction on payment basis by resorting to first proviso to section 40(a)(ia) of the Act. More so, it is settled law that deduction can be permitted in respect of only those expenses which are incurred in the relevant accounting year for the purpose of computing yearly profits and gains. We find that the claim of the assessee on the above two heads of expenses pertaining to earlier period cannot be accepted as it has crystallised in the year and the bills were raised in the earlier assessment year. Being so, the said expenditure cannot be allowed as deduction in this assessment year, which is prior period expenses and first proviso to section 40(a)(ia) has no application in the present case.
Accordingly, the appeal of the assessee is dismissed.
Pronounced in the open court on this 19th day of January, 2022.
Sd/- Sd/- ( N V VASUDEVAN ) ( CHANDRA POOJARI ) VICE PRESIDENT ACCOUNTANT MEMBER
Bangalore, Dated, the 19th January, 2022. /Desai S Murthy /
Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order
Assistant Registrar ITAT, Bangalore.